During COVID lockdown, China’s yuan is set to fall further

During COVID lockdown, China's yuan is set to fall further

Furthermore, the country’s central bank, the People’s Bank of China, has set the yuan’s reference rate in the weaker direction for three consecutive sessions through Tuesday, demonstrating it will tolerate the currency depreciating by a certain amount, the report said. On March 5, the Chinese authorities announced their intention to maintain a stable yuan exchange rate in 2022 and to implement a prudent monetary policy with a view to preventing financial risks and supporting economic growth.

The Yuan is projected to weaken more in the coming weeks as hints emerge that China’s central bank is planning additional interest rate cuts to support the country’s struggling economy. The yuan has fallen substantially in recent weeks as China’s economy stagnated due to zero-COVID restrictions and US interest rates began to rise. According to Asia Nikkei, the currency has dropped 5% since mid-April, reaching 6.74 yuan per dollar in Shanghai on Tuesday, an 18-month low.

China’s export growth witnessed a sharp fall to 3.9 per cent in the month of April, as the draconian COVID-19 curbs that the country imposed in late March in the economic hub of Shanghai, and other cities start to show their effect on the economy. China’s overall trade grew by 2.1 per cent in April, slowing down significantly from 7.5 per cent in March, while the growth in exports saw a significant downturn falling sharply from 14.7 per cent in March to 3.9 per cent in April.

One lingering concern is the risk that a sharply weaker yuan will trigger capital flight. If China goes in the reverse direction of the rate hikes taking place in the U.S. and Europe, it may create pressure on international investors to sell off Chinese government bonds and other assets. It is believed that the PBOC is monitoring the yuan’s movement closely in the run-up to its monetary decision, the report said.

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